As Egypt’s Parliament convenes to discuss the controversial value-added tax law, Egypt’s Ministry of Finance has taken pains to present the law as a moderate reform that will have little financial impact on low-income Egyptians. One point stressed by Deputy Minister of Finance Amr al-Monayer is that the proposed base rate for the VAT, set at 14 percent, is lower than the international average of 17-20 percent.

What the Ministry of Finance fails to mention is the context into which the law is being released — perhaps most importantly, the current rate of inflation. In June, Egypt’s annual headline inflation rate reached a seven-year high of 13.97 percent. In a press conference, Minister of Finance Amr al-Garhy, had anticipated that inflation would increase by an additional 1.3 percentage points.

“Trying to use international average of tax rates on goods and services as an example to be followed by Egypt, while ignoring the discrepancies in inflation rates between Egypt and those countries, is a fallacy,” Osama Diab, researcher at Egyptian Initiative for Personal Rights (EIPR) tells Mada Masr. “The average value of VAT in countries of the Organisation for Economic Co-operation and Development (OECD) appears to be high, but this average comes against a background of a very low inflation rate. In fact, contrary to the situation in Egypt, some countries are actually seeking to raise inflation.”

The following diagram compares the rate of inflation versus the base rate for indirect taxes in OECD countries, including the proposed 14 percent VAT rate for Egypt.

Consumption taxes vs. inflation (By Isabel Esterman)

In addition to inflation, Diab says attempts to assess the impact of the VAT need to factor in the underlying equity — or lack thereof — of tax polices in general. “Indirect taxes — which are basically consumption taxes such as sales tax or VAT — indicate a regressive tendency in taxation policies compared to direct taxation, mainly corporate taxes, which are progressive. The former correlates with the value of consumption regardless of income, while the latter correlates with income,” he says.

Egypt’s tax policies depend mostly on indirect taxes like sales tax, while income from corporate taxation is “extremely low relative to total tax revenue,” he adds.

The following graph illustrates the contrast between revenue from corporate taxes and revenue from taxes on goods and services in fiscal years 2014/15 and 2015/16. Note that the data for 2014/15 is based on actual revenue, while 2015/16 figures refer to budget targets.

Consumption vs. corporate taxes (By Isabel Esterman)

“Indirect taxes, including taxes on goods and services, constitute a high percentage of tax income, amounting to about 40 percent, compared to the meager income from corporate taxes,” Diab says. “Rather than fix this distorted, unjust situation the state seeks to maintain it by issuing the VAT law, which will increase the tax rate and widen its scope to include services, for example. At the same time, it has frozen taxes on capital gains in the stock market and reduced the maximum income tax rate for individuals and companies.”

Deputy Finance Minister Monayer contends that a balance between direct and indirect tax should be achieved by “fighting tax evasion via administrative procedures and reforms, which would increase income from direct taxes with having to increase the tax rate.”

“Despite the implementation of the VAT, it is expected that the percentage of total tax revenue coming from taxes on goods and services will not increase in light of the expected increase in income tax and general taxes,” he adds.

The VAT draft law proposes a base tax rate of 14 percent compared to 10 percent under Egypt’s current general sales tax. Last year, the country’s maximum income tax rate on individuals and companies was lowered from 25 percent to 22.5 percent. A proposed tax on stock market capital gains was also frozen for two years, beginning on May 17, 2015.

The change in tax policy came just before the Sharm el-Sheikh economic conference, and was one of a series of measures aimed at improving Egypt’s investment climate.

The following graph shows the evolution of tax rates for goods and services as a percentage of GDP, compared to the rate of general taxes, which include income tax, corporate tax, taxes on treasury bills, fees and taxes for cars, and taxes on government entities like the Egyptian General Petroleum Corporation (EGPC), the Central Bank of Egypt and the Suez Canal Authority.

Sales vs. general tax revenue per GDP (By Isabel Esterman)

The next graph shows how corporate tax rates compare to VAT rates in countries where the VAT rate is between 17 and 20 percent, the “average figure” mentioned by Monayer.